New Reporting Obligations Under OBBB
Under OBBB (Public Law 119-21), employers and payors must report:
- Cash tips and the occupation of employees receiving them;
- Qualified overtime compensation, i.e. the portion over the base rate under the Fair Labor Standards Act;
- Interest on applicable passenger vehicle loans paid in 2025 or later for vehicles meeting certain criteria. (irs.gov)
These requirements introduce complexity in payroll and bookkeeping systems, especially as many employers are not yet collecting occupation codes or detailed breakdowns.
Transition Relief for Tax Year 2025
To ease the burden, the IRS and Treasury have issued penalty relief for 2025 under Notice 2025-62:
- No penalties for failing to separately report cash tips or the occupation of the tipped employee;
- No penalties for omitting overtime compensation in separate reporting;
provided that a complete, correct return or statement is filed otherwise. (irs.gov)
Also, for interest on applicable passenger vehicle loans in 2025, Notice 2025-57 allows recipients to fulfill the new section 6050AA reporting by providing a statement indicating the total interest received in 2025 — avoiding immediate penalties. (irs.gov)
What Employers Should Do Now
- Update payroll and HR systems to collect occupation codes for tipped employees and distinguish qualifying overtime amounts.
- Ensure loan interest on eligible vehicles is tracked, and vehicle info (make, VIN, etc.) collected to confirm whether vehicle is applicable.
- Train relevant staff (payroll, accounting) on definitions: what counts as “qualified tips,” “qualified overtime,” “applicable passenger vehicle.”
- Keep good documentation — even during 2025 transition — to facilitate compliance when enforcement resumes fully in 2026.
Example Scenario
A restaurant employs servers earning cash tips and pays overtime. In 2025, the restaurant doesn’t collect occupation codes or track tips separately — under transition relief, it won’t face penalties provided the relevant total amounts are reported. Beginning in 2026, though, they must collect these codes and itemized breakdowns — or face penalties. Thus, they should begin readiness work during the last months of 2025.
Key Takeaways for Employers
- Use penalty relief as a buffer to get systems in place rather than an excuse to delay;
- Start collecting extra data now;
- Communicate with employees about reporting changes;
- Consult with payroll service or tax advisor to ensure software updates reflect OBBB requirements.
Category: Compliance